Game Theory Concept

An SEO firm called me today. I personally do not like SEO firms. Most use underhanded tricks to give a business a short-lived boost in search rankings. Some are okay.

This firm “guaranteed” that they would get me more business for less advertising cost. For $1,000 per month, they would tell me what website changes to make to get more business through better search rankings. Simple enough. I pay $1,000. They give me a guaranteed increase in revenue.

Why wouldn’t I just jump on that deal? The sales person seemed stunned that I wasn’t anxious to start now. “Why would you wait?” he asked.

If you are in business, you probably wouldn’t take the deal either. It just doesn’t feel like a great opportunity, does it?

Let’s use Game Theory to analyze their proposal and I’ll show you my counter offer.

In Game Theory, the first thing we look at is the payoff for all concerned. The payoff can be positive or negative. For the sake of simplicity, let’s say that I have a minimum consulting fee of $1,000. (Note: I often charge nothing for a little helpful advice. Some long range contracts run into 6 figures. I’m using this as an example to clarify my point.)

So they want to charge a fee of $1,000 (per month). I want to sell a consulting package of $1,000.

Here is a matrix of possible payoffs.

Outcome

Payoff to Them

Pay off to Me

Their Work Succeeds

$1,000

$1,000 – fee to them = $0

Their Work Fails

$1,000

–$1,000 (Negative payoff)

Their Work Wildly Succeeds (Very Unlikely)

$1,000

$3,000 – $1,000 = $2,000

As you can see from the matrix, they receive a payoff of $1,000 regardless of the outcome. The guarantee isn’t considered because I pay in advance. Whether I get my money back if they fail is up to them. That’s not a good ‘guarantee’ because I have little power to enforce the deal. They are the only party to this deal who gets a guarantee because they get payment upfront.

What’s in this for me? If they succeed, I end up with nothing. If they fail, I’m out $1,000. Only if they wildly succeed do I come out ahead.

Is this a good deal for me? No. Why? Because A) There really is no guarantee for me and B) They have to wildly succeed for me to achieve a gain and C) They win a positive payoff regardless of how hard they work (no incentive to succeed wildly!)

So I offered to restructure the deal this way.

I pay nothing upfront. They get the first $1500 they generate for me. I get the rest. They get paid when I get paid.

This puts them in a position to receive a greater payoff if they do only what they guarantee they will do! It gives me a minimum payoff of $0 instead of -$1,000.

If they do what they claim they will do, they will get at least $1,000. They might get $1,500. I now have a guarantee that if they do not deliver, I risk $0.

Consider this. If they only do what they have already promised, they will get paid. They have an opportunity to make more than under their proposal.

I have not changed the game, only the payoff structure.

What do you think? Did they accept the deal?

When you offer products and services to your customers and prospects, do you consider the structure of the payoffs? If not, you may be harming your sales. You might be forcing yourself to lower your margins (price) simply to hedge against your prospects fear. Change the structure and you can raise your price. But you’ll have to deliver! And that is the point!